Jadeco Construction Corp.
Introduction
This matter is before the Court pursuant to a motion (“Motion“) by the Town of Smithtown (the “Town” or the “Defendant“) for summary judgment to dismiss the complaint filed by Robert Pryor, the Chapter 7 trustee (“Trustee” or “Plaintiff“) in which the Trustee seeks to recover the value of labor and materials provided by the Debtor to the Town pre-petition as a constructive fraudulent conveyance pursuant to
The Town is correct that the contract with the Debtor expired and cannot be enforced. However, the enforceability of this contract is not dispositive of the issues raised in this adversary proceeding. The Trustee seeks to use his strong-arm powers
Procedural History
On April 6, 2016, the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code. On January 31, 2017, the Debtor filed a motion to convert the case to Chapter 7, which was granted, and on March 24, 2017, an order converting the Debtor‘s case to Chapter 7 was entered. On January 22, 2018, the Trustee commenced this adversary proceeding. On February 21, 2018, the Town filed a motion to dismiss the adversary proceeding, which was opposed by the Trustee. On May 3, 2018, an order was entered granting the motion to dismiss only as to the First, Sixth, Seventh, Eighth, Ninth, Tenth and Eleventh causes of action. On October 10, 2018, the Town filed the Motion, and on November 21, 2018, the Trustee filed a Memorandum of Law in Opposition to the Motion. On January 11, 2019, the Town filed a Reply. A hearing was held on January 16, 2019, and on January 31, 2019, the Town and the Trustee filed supplemental memoranda of law. The matter was marked submitted thereafter.
Facts
The Debtor was in the business of providing asphalt and concrete paving of roadways, curbs and sidewalks to local municipalities. Jacinto DeAlmeida was the owner, president and sole officer of the Debtor. The Town is a municipal corporation existing under the laws of the State of New York. In June 2008, the Debtor successfully submitted a proposal in connection with Bid No. 08-050 (“Bid“) to perform certain work for the Town including the removal and replacement of curbs and sidewalks. (Defendant‘s Ex. C). The Bid was signed by Jacinto DeAlmeida on behalf of the Debtor. The contract (“Contract“) awarded pursuant to the Bid authorized the Debtor to perform work from June 15, 2008 through June 17, 2009. The Contract provided for an extension by mutual consent for up to two years. The Debtor performed certain work under the Contract and received payment. In a letter dated April 30, 2009, the Debtor and the Town‘s purchasing director, Joseph Kostecki, agreed to extend the term of the Contract through
On May 31, 2012, the Debtor commenced an action in New York State Supreme Court (the “State Court Action“) seeking entry of a monetary judgment arising from the Town‘s alleged breach of contract. The Debtor sought recovery of $441,667.26, representing the amount the Debtor asserted it was owed under the Contract, plus consequential damages of $336,125.79, representing the amount the Debtor alleged to have borrowed to cover the operating costs incurred as a consequence of the Town‘s refusal to pay for the work performed. On April 6, 2016, the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code. On May 11, 2016, the Debtor filed a Notice of Removal of the State Court Action to the Bankruptcy Court. The removed action (“Removed Action“) was given adversary proceeding no. 16-8062. On June 10, 2016, the Town filed a motion to Abstain and for Remand, which was opposed by the Debtor. On August 2, 2016, the Court entered Supplemental Facts and Conclusions of Law concluding that mandatory abstention from hearing the Removed Action was appropriate (“Abstention Decision“). On January 3, 2017, the Removed Action was closed.
Thereafter, the State Court Action continued in New York State Supreme Court. The Town made a motion for summary judgment seeking dismissal of the complaint, which was granted pursuant to a written decision by Justice Molia dated September 29, 2017 (“Contract Decision“) (Defendant‘s Ex. N). In the Contract Decision, Justice Molia found that although the Debtor and the Town entered into a valid contract for work performed from June 15, 2008 through June 17, 2011, inclusive of appropriate extensions, the Contract was never further extended through any formal resolution passed by the Town Board and executed by the Town Supervisor, as required under
On January 22, 2018, the Trustee commenced this adversary proceeding seeking, inter alia, to recover the value of the labor and materials provided to the Town in the amount of $441,667.26, which corresponds with the amount alleged to be due and owing under the Contract. After ruling on the Town‘s motion to dismiss the adversary proceeding and granting it in part, the only claims remaining are Counts 2, 3, 4, 5 and 7 (“Remaining Claims“), which invoke relief under the constructive fraudulent conveyance statutes of the New York Debtor and Creditor Law (“DCL“).1 These statutes are applicable under the Trustee‘s strong-arm provisions set forth in
By the Motion, the Town seeks dismissal of the Remaining Claims based on the Town‘s argument that the Trustee‘s powers under
Discussion
Summary Judgment Standards
In order to grant summary judgment, “there [must be] no genuine issue as to
Roles of the Parties
Before analyzing the issues raised in the Motion, the roles of the parties as transferor and transferee must be sorted out, and the subject matter of the transfer must be determined. First, in its initial moving papers, the Town incorrectly asserted that the Debtor is the creditor and not the transferor, and fails to identify the “transfer” as the materials and labor provided by the Debtor to the Town. The Town‘s arguments seem to be largely predicated on what appears to be a fundamental misunderstanding of sections
Section
While a fraudulent conveyance claim belongs to the debtor‘s creditors prepetition, courts have held that the claim becomes an asset of the debtor‘s estate upon the filing of a bankruptcy petition. In re Tribune Co. Fraudulent Conveyance Litigation, 818 F.3d at 117.2 The targeted asset does not become property of the debtor‘s estate until the trustee obtains a favorable judgment. Picard v. Fairfield Greenwich Ltd., 762 F.3d 199, 212 (2d Cir. 2014). In the instant case, the Trustee stands in the shoes of a creditor of the Debtor, which vests the Trustee with standing to recover fraudulent conveyances. Under Article 10 of the DCL, a “conveyance” is defined as “every payment of money, assignment, release, transfer, lease, mortgage or pledge of tangible or intangible property, and also the creation of any lien or incumbrance.”
Once a transfer is avoided under Section
Preemption
A threshold issue for the Court to consider is whether the preemption doctrine applies to this proceeding. One of the Town‘s major arguments in favor of dismissing the Remaining Claims is that directing the Town to pay for the materials and labor supplied by the Debtor would violate
Congress is vested with the exclusive power under the Bankruptcy Clause of the U.S. Constitution to enact uniform laws governing bankruptcy.
Federal law preempts state law in three circumstances: (1) express preemption; (2) field preemption; and (3) conflict preemption. New York SMSA Ltd. Partnership v. Town of Clarkstown, 612 F.3d 97, 104 (2d Cir. 2010). The question of whether preemption applies is always dependent on Congressional intent. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 45 (1987) (“The purpose of Congress is the ultimate touchstone.“). Express preemption occurs when Congress identifies state law it considers to be inconsistent with goals of the federal law at issue. See id. When Congress expressly states that its laws pre-empt state law, then preemption is clear and unequivocal. English v. General Elec. Co., 496 U.S. 72, 79 (1990). It has been recognized that where express preemption is lacking, a “preemptive effect may be inferred where it is not expressly provided.” In re Tribune Co. Fraudulent Conveyance Litigation, 818 F.3d at 109. In the absence of express preemption by Congress, state law is impliedly preempted when there is field preemption or conflict preemption. Altria Group, Inc. v. Good, 555 U.S. 70, 76-77 (2008). Field preemption occurs “when Congress intends that federal law occupy a given field.” In re Enron Corp., 327 B.R. 526, 530 (Bankr. S.D.N.Y 2005). “Field preemption reflects a Congressional decision to foreclose any state regulation in the area even if it is parallel to federal standards.” Arizona v. United States, 587 U.S. 387, 400 (2012). Conflict preemption may occur in two circumstances: first, where it is impossible to comply with the state and federal law, or where state law “‘stands as an obstacle to accomplishment and execution of the full purposes and objectives of Congress.‘” English v. General Elec. Co., 496 U.S. at 79 (other citations omitted). What qualifies as a sufficient obstacle is to be determined by reviewing the federal statute as a whole, and examining its purpose and effects. In re Westby, 473 B.R. 392, 412 (Bankr. D. Kan. 2012).
Even if there is an apparent conflict, the Supreme Court has recognized that the Bankruptcy Code will not preempt a state statute that is “reasonably designed to protect the public health or safety from identified hazards.” Midlantic Nat. Bank v. New Jersey Dept of Environmental Protection, 474 U.S. 494, 507 (1986). In addition, there is an assumption that the historic police powers of a state will not be superseded by a federal law absent a finding of clear Congressional intent to preempt state law. Altria Group, Inc. v. Good, 555 U.S. at 77.
In
Certainly, New York State has a strong interest in assuring that its citizens meet their tax obligations and to enforce those obligations when they remain unmet. However, that interest cannot overcome Congress’ policy choice that reasonably equivalent value must be obtained for a transfer of a debtor‘s property in the bankruptcy context, where the rights of other creditors are prejudiced. . . . The Bankruptcy Code affords taxing authorities no exception, and a taxing authority is bound by the Bankruptcy Code to the same extent as any other creditor.
In re Murphy, 331 B.R. at 120. The Bankruptcy Court in Murphy recognized that a forfeiture of property, even if valid under applicable non-bankruptcy law, could still be subject to avoidance under the Bankruptcy Code for providing less than reasonably equivalent value:
Forfeiture of property to the taxing authority under the R.P.T.L. for persistent refusal to pay taxes is a matter of state law, which is
heavily invested with public interest for the State of New York and its local communities. State law and public interest must be respected except to the extent that federal law [supersedes] the under the Supremacy Clause of the Constitution. Art VI c. 2. The Bankruptcy Code is not concerned with the obligation and rights of taxpayers and taxing authorities under state laws, except (in the context of this case) to the extent that the bankruptcy objectives expressed in Section 548 must preempt state law. The bankruptcy objective of the avoidance powers . . . is to protect creditors generally from prejudice resulting from transfers of the debtor‘s property for less than fair consideration, resulting in diminution of the debtor‘s estate available to pay creditors.
Id. at 122.
The conflict between New York forfeiture law and federal bankruptcy avoidance law was resolved in favor of the bankruptcy law under the Supremacy Clause, but only to the extent that recovery of the transfer would benefit the creditors. Id. The Court concluded that there was no federal bankruptcy interest in upsetting state property interests to allow the debtor to personally benefit from an avoidance
The Murphy decision clearly supports the Trustee‘s argument that the rights of the creditors in this case to recover the value of a fraudulent transfer are superior to the admittedly strong interest New York state has in protecting the public interest in the prudent and economical use of taxpayer funds. There does not appear to be any threat that the Debtor would receive any surplus in this case, so the factors considered in limiting any recovery in the Murphy case do not apply to this adversary proceeding.
In this case, there is some basis to the argument that the
The Town asserts that compelling State interests override the federal bankruptcy laws regarding recovery of the value of the labor and materials provided by the Debtor. The state interests the Town identifies concern protection of the public, the prevention of corruption, and the safeguarding of taxpayer dollars from unscrupulous vendors and municipal employees. While the Bankruptcy Code does not concern itself with the rights of taxing authorities under applicable state law, the interests protected by these state laws must be subservient to the statutes passed by Congress and incorporated into the Bankruptcy Code, which promote the objectives of protecting a debtor‘s creditors from harm as a result of transfers made by a debtor for less than fair consideration.
The Town‘s claim that the State interests it seeks to protect are so great that the avoidance statutes in the Bankruptcy Code must give way is unavailing. While there is significant interest in protecting the public from extravagance and collusion, the public health or safety would not be threatened if the Trustee were to prevail on the Remaining Claims. Unlike the case of Midlantic Nat. Bank v. New Jersey Dept of Environmental Protection, 474 U.S. 494, the public‘s health and safety is not at risk if the Trustee is permitted to recover the value of the materials and labor provided to the Town under §§
Effect of the Contract Decision on This Adversary Proceeding
In addition to claiming that the State‘s interest in protecting the taxpayers outweighs any interest in maintaining a fraudulent conveyance action for the benefit of the creditors of the Debtor, the Town asserts that the findings in the Contract Decision preclude this Court from ruling in favor of the Trustee with respect to the Remaining Claims.
According to the Town, Justice Molia‘s prior rulings in the Contract Decision bar recovery by the Trustee in this adversary proceeding. First, the Town alleges that the issues raised in the Remaining Claims have already been litigated and should be dismissed for lack of jurisdiction under the Rooker-Feldman doctrine. The Rooker-Feldman doctrine concerns the application of
As the Supreme Court enunciated in Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 284 (2005), the Rooker-Feldman doctrine “is confined to cases . . . brought by state-court losers complaining of injuries caused by state-court judgments rendered before the district court proceedings commenced and inviting district court review and rejection of those judgments.” In Exxon Mobil Corp., the Supreme Court recognized that the Rooker-Feldman doctrine is a narrow jurisdictional bar to litigation where the losing party “repairs to federal court to undo the [state court] judgment in its favor.” Id. at 293. However, the Supreme Court cautioned that ”Rooker-Feldman does not otherwise override or supplant preclusion doctrine or augment the circumscribed doctrines that allow federal courts to stay or dismiss proceedings in deference to state-court actions.” Id. at 284. In fact, “[i]f a federal plaintiff ‘present[s] some independent claim, albeit one that denies a legal conclusion that a state court has reached in a case to which he was a party . . . , then there is jurisdiction and state law determines whether the defendant prevails under principles of preclusion.‘” Id. (quoting GASH Assocs. v. Village of Rosemont, 995 F.2d 726, 728 (7th Cir. 1993)).
Courts examining the reach of the Rooker-Feldman doctrine have concluded that it has little to no application in the context of avoidance actions under the Bankruptcy Code. The reason is aptly explained by the Ninth Circuit in In re Gruntz, 202 F.3d 1074, 1078-79 (9th Cir. 2000):
[The Rooker-Feldman] doctrine arises out of a pair of negative inferences drawn from two statutes:
28 U.S.C. § 1331 , which establishes the district court‘s ‘original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States‘; and28 U.S.C. § 1257 , which allows Supreme Court review of ‘[f]inal judgments or decrees rendered by the highest court of a State in which a decision could be had.’ Rooker itself relied upon the ‘legislation of Congress,’ namely the predecessors of these statutes in the Judicial Code. . . . Of course, the statutes that form the basis of the Rooker-Feldman doctrine co-exist among other federal jurisdictional laws. To derive a coherent theory of federal jurisdiction, one must consider the entire federal jurisdictional constellation. . . . It is well-settled that the Rooker-Feldman doctrine does not touch the writ of habeas corpus. . . . [H]abeas corpus is not an ‘exception’ to Rooker-Feldman, but a procedure with roots in statutory jurisdiction parallel to- and in no way precluded by, the doctrine. So, too, it is with bankruptcy law.In apparent contradiction to the Rooker-Feldman theory, bankruptcy courts are empowered to avoid state judgments, see, e.g., 11 U.S.C. §§ 544 ,547 ,548 ,549 ; to modify them . . ., and to discharge them. . . .
Courts have routinely held that the Rooker-Feldman doctrine is simply not relevant where federal statutes, such as Sections
Even if the Court were to apply the Rooker-Feldman analysis to determine whether the Remaining Actions were barred, the Town cannot satisfy the requirements. In our case, the Trustee does not seek to disturb the findings in the Contract Decision. The Trustee asserts independent federal claims, and is not inviting review and rejection of the Contract Decision. The Third Circuit‘s decision In re Philadelphia Entertainment & Development Partners, 879 F.3d 492 (3d Cir. 2018) is most instructive. In In re Philadelphia Entertainment & Development Partners, the Third Circuit Court of Appeals was called on to determine whether the District Court, which affirmed the Bankruptcy Court, erred when it held that the Rooker-Feldman doctrine barred the Chapter 11 trustee from commencing a fraudulent transfer action against the Pennsylvania Gaming Board for revoking the Chapter 11 debtor‘s slot machine license, for which the debtor paid $50 million. In analyzing whether to grant the motion to dismiss the complaint, the Bankruptcy Court held that the estate‘s right to be compensated for the value of the license was the “functional equivalent” of the right to retain the license, which required a conclusion that the Rooker-Feldman doctrine barred any claim for the value of the license. 879 F.3d at 497 (citing lower court decision).
The Third Circuit reversed, holding that trustee was not inviting review and rejection of the underlying state court decision to revoke the gaming license:
The Bankruptcy Court could have answered these questions without rejecting or even reviewing the Commonwealth Court‘s decision. And, if it accepted the Trustee‘s argument, the Bankruptcy Court would have concluded that the Bankruptcy Code permitted avoidance of the transfer, not that the Commonwealth Court had committed legal error.
Id. at 501 (footnote omitted). Based on its analysis, the Third Circuit concluded that the Pennsylvania Gaming Board had not met the standard for invoking the Rooker-Feldman doctrine. The Court finds this analysis equally applicable to this case. The Trustee does not seek to overturn the Contract Decision, but seeks recovery for the materials and labor provided by the Debtor without the benefit of a contract. For these reasons, the portion of the Motion seeking dismissal of the Remaining Claims based on the Rooker – Feldman doctrine is denied.
Under New York law, collateral estoppel prevents parties from relitigating an issue when “(1) the identical issue necessarily was decided in the prior action, and (2) the party to be precluded from relitigating the issue had a full and fair opportunity to litigate the issue in the prior action. Denton v. Hyman (In re Hyman), 502 F.3d 61, 65 (2d Cir. 2007) (citations omitted), cert denied, 555 U.S. 1097 (2009); Evans v. Ottimo, 469 F.3d 278, 281 (2d Cir. 2006).
The first prong is not satisfied in this case. The issues raised in the State Court Action, and distilled and decided in the Contract Decision concerned whether the Contract was enforceable based on applicable State and municipal law. The State Court Action did not involve whether the transfer of materials and labor by the Debtor to the Town constituted a fraudulent conveyance. The Town mistakenly argues that the property the Trustee is seeking to recover is the payment from the Town under the Contract. However, the Trustee is not claiming that the monies owed under the Contract are property of the Debtor‘s estate. Therefore, the Town‘s argument is easily rejected. Clearly, the estate has no interest in monies due under a contract that is invalid as a matter of law. The property conveyed is labor and materials provided to remove and build the curbs sidewalks, not the moneys allegedly owed under the Contract. Section
The Town also incorrectly argues that the Remaining Claims could have been asserted in the State Court Action. However, these are claims under
Res judicata does not bar this proceeding either. The doctrine of res judicata is grounded in the Full Faith and Credit Clause of the United States Constitution.
Under the doctrine of res judicata, this Court is bound to accept the State Court‘s determinations, which would include that the Contract expired as a matter of law. The Town also asserts that the remaining elements of res judicata are met, and that as a result, the Remaining Claims are barred. However, res judicata does not apply to a chapter 7 trustee:
[T]he trustee in bankruptcy . . . represents all creditors.” . . . As such, the trustee is not simply the successor in interest to the debtor; he represents the interest of all creditors of the debtor‘s bankruptcy estate. . . . Because the trustee is invested with ‘extraordinary rights . . . as a general representative of . . . creditors,’ he is ‘not bound, either on res judicata or judicial collateral estoppel [grounds] by the prior state proceedings.
In re DLC, Ltd., 295 B.R. 593, 602 (8th Cir. B.A.P. 2003) (citing In re Marlar, 252 B.R. 743, 757 (8th Cir. B.A.P. 2000) (other citations omitted)).
Even if the Trustee were deemed to be in privity with the Debtor with respect to the State Court Action, the State Court Action, which was a contract dispute, did not concern the same claims as the fraudulent transfer claims asserted in this adversary proceeding. In re DLC, Ltd., 295 B.R. at 604. Whether the Contract is enforceable is not relevant to the Remaining Claims. The Trustee is not entitled to recover the monies allegedly due under the Contract. This is an entirely separate claim to recover the value of the labor and materials transferred to the Town for no consideration. Therefore, the Town cannot satisfy the fourth element of res judicata.
iii. Abstention
The Town asserts that because this Court previously granted its request to abstain from deciding the Removed Action, the Court should abstain from hearing the Remaining Claims as well. This Court did find that the Removed Action was not, as alleged by the Debtor, akin to a turnover action under
Remaining Arguments Raised by the Town
Having analyzed the Town‘s arguments regarding subject matter jurisdiction, the Court now turns to the Town‘s challenges to the specific elements of the Remaining Claims. First, the Town asserts that under the DCL, personal services do not constitute conveyances that may be recovered by the Trustee. Second, the Town alleges that the Trustee cannot establish the requisite intent on the part of the Debtor for the purposes of the fourth cause of action under
Article 10 of the New York Debtor & Creditor Law defines a “conveyance” as “every payment of money, assignment, release, transfer, lease, mortgage or pledge of tangible or intangible property, and also the creation of any lien or incumbrance.”
As to whether summary judgment can be granted in the Town‘s favor as to the fourth cause of action under
Every conveyance made and every obligation incurred without fair consideration when the person making the conveyance or entering into the obligation intends or believes that he will incur debts beyond his ability to pay as they mature, is fraudulent as to both present and future creditors.
The Town states that the Trustee cannot establish as a matter of law that at the time the Debtor provided the labor and materials pursuant to the Town‘s directive, the Debtor intended to incur debts beyond its ability to repay. While the Debtor may not have had such intent, the Town has failed to address whether the Debtor believed that by performing the work in question, it would incur debts beyond its ability to pay them as they mature. Therefore, the Debtor will have its chance to establish the elements of this cause of action at trial.
The Town also states that the Trustee cannot establish that the Debtor was insolvent or rendered insolvent as a result of the transfers. Proof of insolvency is an element of
Conclusion
For the reasons set forth above, the Motion is denied in its entirety. The Court shall enter an order consistent with this Memorandum Decision, along with a Pretrial Order scheduling a trial on the Remaining Claims.
Robert E. Grossman
United States Bankruptcy Judge
Dated: Central Islip, New York
July 10, 2019